How the Fed Rate Hike Will Affect Your Credit Card Debt

Category: Credit Card Debt Published: Saturday, 26 December 2015 Written by Super User
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Federal Reserve Chair Janet Yellen announced today that the Fed would raise interest rates by a quarter to a half a percentage point, after seven years at essentially zero. In fact, the last time the Fed raised interest rates was in 2006, before the iPhone came out and the Kardashians kidnapped the kountrys konsciousness via the E! Network.

For people looking to buy a real estate, this is not the best of news (nor is it the worst). For investors, time will tell (though the market was up more than 200 points following the announcement). But if you have any credit card debt, this much is certain: youre going to see your interest rates go up.

Most credit cards these days dont have fixed interest rates but instead favor variable interest rates, usually tied to the prime rate. That way credit card companies are allowed to raise themsomething that fixed-rate cards cant do after the Credit CARD Act of 2009. Since the prime rate is usually around 3% more than the Feds rate, cardholders are going to see a small jump.

But how fast will it happen and should you be worried?

NerdWallet.coms credit card expert Sean McQuay says credit card borrowers might have a small reprieve before the increase hits. Most banks will adjust on the next billing month, some next quarter, he told MONEY. For new cardholders, however, McQuay says the hike will be immediate.

Exactly how much this will affect you depends on how much you have borrowed on your credit card. Credit card interest rates are generally very highthe average is around 18%so a quarter of a point might not make much of a difference. Say youre on the hook for $5,000, for example, and interest rates go up 0.25%; the additional interest would only be around a dollar per month

NerdWallet has done the math and found that the average indebted American household can expect to spend an additional $125 in credit card interest over the next five years, McQuay says. While thats still real money, this shouldnt significantly impact your financial standing.

That figure assumes the current rate holds throughout the five-year period, but rates probably will continue to risealbeit slowlypinching your wallet further. Still, if you can pay down your balance now, youll be better off. High interest rates are never nice things to have in your life.

Read next: What the Feds Move Means for Mortgage Rates

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